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Working Paper Series (WPS) Is Produced by the Development Research Department of the African Development Bank No 209– October 2014 What is Driving the ‘African Growth Miracle’? Margaret McMillan and Kenneth Harttgen Editorial Committee Rights and Permissions All rights reserved. Steve Kayizzi-Mugerwa (Chair) Anyanwu, John C. Faye, Issa The text and data in this publication may be Ngaruko, Floribert reproduced as long as the source is cited. Shimeles, Abebe Reproduction for commercial purposes is Salami, O. Adeleke forbidden. Verdier-Chouchane, Audrey The Working Paper Series (WPS) is produced by the Development Research Department of the African Development Bank. The WPS disseminates Coordinator the findings of work in progress, preliminary Salami, Adeleke research results, and development experience and lessons, to encourage the exchange of ideas and innovative thinking among researchers, development practitioners, policy makers, and donors. The findings, interpretations, and conclusions expressed in the Bank’s WPS are entirely those of the author(s) and do not Copyright © 2014 necessarily represent the view of the African African Development Bank Development Bank, its Board of Directors, or the Angle de l’avenue du Ghana et des rues Pierre de countries they represent. Coubertin et Hédi Nouira BP 323 -1002 Tunis Belvédère (Tunisia) Tel: +216 71 333 511 Fax: +216 71 351 933 Working Papers are available online at E-mail: [email protected] http:/www.afdb.org/ Correct citation: McMillan, Margaret; and Harttgen, Kenneth (2014), What is Driving the ‘African Growth Miracle’?, Working Paper Series N° 209 African Development Bank, Tunis, Tunisia. AFRICAN DEVELOPMENT BANK GROUP What is Driving the ‘African Growth Miracle’? Margaret McMillan and Kenneth Harttgen1 Working Paper No. 209 October 2014 Office of the Chief Economist 1 Margaret McMillan, Department of Economics, Tufts University, Medford MA, IFPRI and NBER and Kenneth Harttgen, Senior Researcher, Development Economics ETH Zurich NADEL, Center for Development and Cooperation. This is a revised version of a paper that was prepared as a background paper for the African Economic Outlook 2013. The authors are grateful to Matthew Johnson and Inigo Verduzco-Gallo for excellent research assistance and Rodrigo Garcia-Valdes, Alun Thomas, Doug Gollin, David Lagakos and Michael Waugh for providing data. The authors would also like to thank Adam Storeygard, Xinshen Diao, Doug Gollin, Remi Jedwab, William Masters, Jan Rielander, Dani Rodrik, Abebe Shimeles, Erik Thorbecke and Enrico Spolaore for helpful comments. We would also like to gratefully acknowledge financial support from the DFID-ESRC Growth Research Programme (DEGRP) project titled ‘Structural change and productivity growth in Africa.’ Abstract We show that much of Africa’s recent growth and poverty reduction can be traced to a substantive decline in the share of the labor force engaged in agriculture. This decline has been accompanied by a systematic increase in the productivity of the labor force, as it has moved from low productivity agriculture to higher productivity manufacturing and services. These declines have been more rapid in countries where the initial share of the labor force engaged in agriculture is the highest and where commodity price increases have been accompanied by improvements in the quality of governance. 1. Introduction Even if you don’t believe in miracles, it cannot be denied that Africa has come a long way over the past 15 years. As recently as 2000, the front cover of the Economist proclaimed Africa “the hopeless continent” (Economist, 2000). Yet recent evidence suggests that the continent is anything but hopeless. The share of the population living on less than $1.25 a day fell from 58 percent in 2000 to 48 percent in 2010, infant mortality rates declined significantly, and access to education generally improved (Page and Shimeles, 2014). Average growth rates have been positive for the first time in decades and, in some of the fastest growing economies, have exceeded 6 percent per annum; moreover, these growth rates are likely to be underestimated. Young (2012) finds that real consumption in Africa has been growing between 3.4 and 3.7 percent per year or three to four times the 0.9-1.1 percent growth reported using national accounts data; he dubs this an ‘African Growth Miracle’. The reasons behind this success are not well understood. The main contribution of this paper is to show, for the first time, that the ‘African Growth Miracle’ can be traced to a significant decline in the share of the labor force engaged in agriculture. Previous researchers have shown that agriculture is by far the least productive sector in Africa (McMillan and Rodrik (2011) and Gollin, Lagakos and Waugh (2014)) and that income and consumption are lower in agriculture than in any other sector (McMillan and Verduzco (2012) and Gollin, Lagakos and Waugh (2014)). Researchers have also noted that real consumption is growing in Africa (Young (2012)) and that poverty is falling (Shimeles and Page (2014)). To our knowledge, this paper is the first to connect these improvements in living standards to important occupational changes. We show that, between 2000 and 2010, in Sub-Saharan Africa, the share of the labor forced employed in agriculture declined by roughly 10 percentage points.2 The decline in the share of employment in agriculture has been matched by a 2 percentage point increase in the share of the labor force engaged in manufacturing and an 8 percentage point increase in services. The results above are consistent with the early work by the prominent scholars Theodore Schultz and Arthur Lewis. In 1979, Schultz and Lewis received the Nobel Prize for their work explaining how and why agriculture often remains a relatively low-productivity sector, despite growth in average national income and productivity levels. And although they differed in their prescriptions for developing countries, both viewed the persistence of low productivity in agriculture as a root cause of poverty. In Lewis’ principal model, low farm productivity persists until non-farm employment expands enough to absorb rural population growth, while Schultz’s main contributions address how to raise the productivity of those workers who remain in agriculture. There has been very little evidence on how structural change — that is, the reallocation of economic activity away from agriculture to more productive sectors — has evolved in Africa since independence across the continent was achieved half a century ago. A major reason for this has been the quality and frequent absence of rigorous economic data for many African countries. A deeper reason is poverty itself. Until recently, few African countries have enjoyed the sustained economic growth needed to trace out the patterns of structural transformation achieved in earlier decades elsewhere. The start of the 21st century saw the dawn of a new era in which African economies grew as fast, or faster, than the rest of the world. Examining the recent process of structural change in Africa, and its role in economic growth can yield enormous benefits. For one, the theory and stylized facts of structural change offer several predictions about the allocation of the factors of production for countries at different stages of development. As Sub-Saharan Africa is now by far the poorest region of the world, including African countries in the analysis can enrich the current understanding of how structural change has recently played out around the world. Perhaps more importantly, and most pertinent to this 2 This estimate is based on a sample of more than 24 countries and is robust to the source of data. In particular, we verify estimates based on census and labor force surveys using data from the Demographic and Health Surveys (DHS). 1 paper, is that such an analysis can offer insights into the distributional implications of the continent’s recent economic performance. We begin our analysis by asking whether it is reasonable to compare structural change in Africa to other regions during the same time period. Average incomes in Africa are significantly lower than in East Asia, Latin America and all other regions. If countries at different stages of development tend to exhibit different patterns of structural change, the differences between Africa and other developing regions may be a result of their different stages of development. Motivated by this possibility, we explore how the level of employment shares across sectors in African countries compare to those in other countries, controlling for levels of income. We find that African countries appear to fit seamlessly into the pattern observed in other countries. In other words, given current levels of income per capita in Africa, the share of the labor force in agriculture, manufacturing, and industry is roughly what we would expect. Having confirmed that African countries were characterized by very high employment shares in agriculture in 1990, we turn to an investigation of changes in agricultural employment shares. For a sample of 19 African countries, we find that for the period 2000-2010: (i) the share of the labor force engaged in agriculture declined by an average of 10.61 percentage points; (ii) the share of the labor force engaged in manufacturing expanded by an average of 2.15 percentage points; (iii) the share of the labor force engaged in services increased by an average of 8.23 percentage points; (iv) the share of the labor force engaged in mining did not change. Combining these data on employment shares with data on value-added, we show that for the period 2000-2010, structural change accounted for roughly half of Africa’s growth in output per worker. The results above are encouraging, but how much can the estimates be trusted? Even if the quality of the surveys is strong, there are differences in methodology and definitions across surveys and across countries that can contaminate the estimates. Thus, an additional goal of this paper is to verify the robustness of our employment share estimates (and the changes in employment shares) using the Demographic and Health Surveys (DHS).
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